The Corporate Transparency Act Impacts Small Businesses in the U.S.
Capitol building in Washington, DC. Photo Daniel Mennerich, via Flickr
Everyone with an LLC or considering forming an LLC have until January 2025 to file the paperwork or possibly face fines or jail.
Beneficial Ownership Reporting Obligation
A far-reaching new law has been passed that definitely affects you if you are registered to do business in the United States, including small entities like single-member LLCs.
Financial Crimes Enforcement Network (FinCEN)
FinCEN opened the online portal for filing Beneficial Ownership Information reports on January 1, 2024. You can view informational videos and webinars, find answers to frequently asked questions, connect to the contact center, and learn more about how to report at www.fincen.gov/boi.
This new reporting requirement, created by the Corporate Transparency Act (CTA), calls for most companies to file a document with the federal government disclosing information about the beneficial owners of the entities, in effect showing "beneficial ownership" or substantial control of an entity. The law was passed in 2022 to help financial regulators see more clearly who might be using a company for illegal purposes.
You are considered a domestic reporting company if your business is a corporation, limited liability company, and any other entity created by the filing of a document with a secretary of state or any similar office in the United States.
What Kind of Information Has to Be Reported
Generally, reporting companies must provide four pieces of information about each beneficial owner:
name;
date of birth;
address; and
the identifying number and issuer from official government documentation (e.g., a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State, local government, or Indian tribe)
Exceptions to Reporting
Securities reporting issuer
Governmental authority
Bank
Credit union
Depository institution holding company
Money services business
Broker or dealer in securities
Securities exchange or clearing agency
Other Exchange Act registered entity
Investment company or investment adviser
Venture capital fund adviser
Insurance company
State-licensed insurance producer
Commodity Exchange Act registered entity
Accounting firm
Public utility
Financial market utility
Pooled investment vehicle
Tax-exempt entity
Entity assisting a tax-exempt entity
Large operating company
Subsidiary of certain exempt entities
Inactive entity
Substantial Control
Individuals have substantial control of a reporting company if they direct, determine, or exercise substantial influence over important decisions of the reporting company. [31 CFR §1010.380(d)(1)]. Those deemed to exercise substantial control over a reporting company include:
Senior officers such as chief financial officers, chief executive officers, general counsel, chief operating officers, or any other similar positions, regardless of title;
An individual with authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
An individual who directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
The reorganization, dissolution, or merger of the reporting company;
Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
Compensation schemes and incentive programs for senior officers;
The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
Amendments of any substantial governance documents of the reporting company;
An individual with any other form of substantial control over the reporting company
An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:
Board representation (determined on a case-by-case basis);
Ownership or control of a majority of the voting power or voting rights of the reporting company;
Rights associated with any financing arrangement or interest in a company;
Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
Any other contract, arrangement, understanding, relationship, or otherwise.
Based on the breadth of the substantial control definition, FinCEN has stated that it expects a reporting company will identify at least one beneficial owner under that definition, regardless of whether (1) any individual satisfies the ownership definition, or (2) exclusions to the definition of beneficial owner apply.
Deadlines
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report. A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective, and a company created or registered on or after January 1, 2025 will have 30 calendar days to file. There is no fee to submit your BOI report. File your BOI report here: https://boiefiling.fincen.gov/fileboir.
Anyone whom the reporting company authorizes to act on its behalf—such as an employee, owner, or third-party service provider—may file a BOI report on the reporting company’s behalf.
Beware Scammers!
The Financial Crimes Enforcement Network also warns of targeted fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code. FinCEN does not send unsolicited requests.
If you have questions, check with your financial services provider or your attorney.
Conclusion
Corporations, partnerships, limited liability companies, trusts, etc., have historically been creatures of state law with initial formation detail typically maintained by a secretary of state’s office (or equivalent). By adding a mandated federal reporting layer on top of these traditionally state functions, this rule completely changes the ballgame for compliance and recordkeeping purposes, particularly for smaller entities that have not yet invested in robust compliance and recordkeeping functions.
Given the intentionally broad scope of this federal mandate, all impacted companies, regardless of size, should anticipate devoting additional attention to compliance efforts and recordkeeping functions regarding beneficial ownership and other reporting requirements in the coming years to help assure compliance and limit gratuitous disclosure of sensitive information.
The contents of this article are intended to convey general information only and not to provide legal advice or opinions, and should not be construed as, and should not be relied upon for, legal advice in any particular circumstance or fact situation. Nothing in this article is an offer to represent you, and is not intended to create an attorney-client relationship.